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I'm using a Kodak Zi8 at the moment, but I've noticed this effect on other cameras. When a camera is moving it occasionally produces fun house mirror-style effects. It makes things appear to stretch and shrink. Is this a software issue or a problem with cheap components? Are there any cameras that don't produce this effect?

3 Answers
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This "effect" is called Rolling Shutter. It is common in most CMOS camera sensors because they don't capture an instantaneous image, instead they do it progressively over a period of time. CCD sensors do not have this problem as they do have instantaneous capture.

It is down to the raster/line speed of the CMOS array in your camera - it does not expose the whole thing at once, it scans from left to right and downwards. For even more amusement google for iPhone propellor videos, such as this one, or in fact any video of oscillating or moving objects.

The solution is to get equipment with slightly more upmarket sensor arrays.